Armstrong Capital Newsletter

September 2008

 

 

Jeffrey R. Armstrong

President of Armstrong Capital

 

 

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           Hello! I hope you had a terrific summer, now it's time to get back to working the business.  This is the perfect time to get to note holders.  They need cash to pay for their summer vacations and they are looking ahead and will need cash for the upcoming holidays and travel. Keep up your marketing, do your follow up and definitely offer partials.

            This month I want to share with you a recent article I wrote concerning the licensing issue in California for note brokering.  As you will read below, this pertains to all note brokers across the nation because if you do not have a California Real Estate Brokers License you may not broker notes in California, whether you live in California or not. This is the most up to date information on licensing requirements for California that I know of.  It's a little long but reading it through to the end will be worth it.  Also, don't shoot the messenger, just trying to keep you informed.

 

California Note Brokering Licensing Issue

 

        If you are considering buying and selling seller financed notes secured by real estate you may want to do a little research on any regulations or licensing requirements your particular state may require.  Of the very few states that have any regulations at all, regulatory agencies are starting to crack down on non-complying or unlicensed note brokers. One such state is California and since that is the state I work out of I did some current up to date research and got some very surprising answers as you will read below.

        Between February 19, 2008 and April 24, 2008 I exchanged emails and spoke to over the phone Gary Sibner, the Managing Deputy Commissioner III with the California Department of Real Estate in the Mortgage Loan Activities Unit. I've been trying for months to get a straight answer about the licensing requirements for note brokers in and out of the state of California for quite some time and I think this article will finally give you some clarity. It may not be what you want to hear but it is fact.

        Although they would not put anything in writing the answers and information below are taken from various emails and conversations with Gary Sibner. Mr. Sibner stated that, "…the DRE does not provide written opinions except under Article 5 of the Real Estate Law (Sections 10230, et. Seq.) And this subject does not fall within Article 5…"

         So he went on to explain Section 10131.1 of the Business and Professions Code deals with persons acting as a principal, which is using their own funds. Persons acting as brokers, and not as principals, are not covered by that section of the law. Section 10131(d) and (e) also provide for the licensing requirement of those who broker real estate secured notes. Also, a California Attorney General's Opinion covered the issue of "with the public" to include financial institutions. The location for that is 68 Op. Gen. 286 (Opinion No. 84-903) October 23, 1985; to Mr. Sibner's knowledge, that opinion is still effective.

        We have always gone by the guideline that an individual is allowed to broker 7 notes per year in California , and then you have to have your Real Estate Broker's license. Well, that's not exactly the case.  If you purchase the notes for your own account to hold them you can buy as many as you want per year and you would not need to be licensed. If you purchase notes for yourself and then subsequently resell those notes the next day or at a later date you are allowed to do seven of those transactions per year and then you will be required to have your Real Estate Broker's license.

         Here it is - If you solicit for and broker notes to institutional, individual or private investors, in or out of the state of California you are required to have either a Real Estate Sales Agents license that is hanging under a supervising Real Estate Broker OR your own RE Broker's license. Even for just one note.

        I then asked Mr. Sibner some pointed questions to be sure there is no gray area moving forward, the questions and answers follow:

Can an individual in CA solicit individuals who are holding notes secured
by CA real estate without a CA RE Brokers license?

NO & Business and Professions Code 10130

 

Can an individual in CA solicit for and broker notes where the property
securing the note is outside of CA without a CA RE Brokers license?
NO.

 

Can an individual from out of the state solicit individuals who are holding
notes secured by CA real estate?

NO.

 

If an individual in CA brokers notes to institutional corporate investors
and not to individual investors do they need a CA RE Broker's license?
YES.

 

If an individual in CA refers notes to institutional corporate investors
and not to individual investors for a referral fee do the need a CA RE
Broker's license?

NO. However, there is a narrow "finder's" exemption that if the referrer or "finder" did NOT solict nor engage in negotiation with the note holder they can earn a fee without a CA RE Broker's license.  Be careful, read the words.  If we are in the business of note brokering and note buying then we will be soliciting note holders and thus, again, we would need to have a CA RE Broker's license.

 

If an individual lives in CA can they broker 7 notes a year before they
need a CA RE Broker's License?
NO - Business and Professions Code 10131.1 & unless bought as a principal using your own money.  Mr. Sibner also stressed that you must be using your own money for the 7 notes rule to apply. Meaning you cannot go around this rule by just doing double documents and putting the note in your name for a day then assigning it over to the actual end note buyer the next.

 

If an individual does not live in CA can they broker an unlimited amount of
CA notes or the same 7 notes a year secured by CA real estate before they
need, if at all, a CA RE Broker's License?
NO & the same regulations apply & if you are brokering a note in California and you live out of state you must have a CA Real Estate Broker's license or a CA Real estate Agent's license hanging under a supervising CA Real Estate Broker.  If you are buying them for your own account to hold them for the entire term you can buy as many California notes as you want without a license.

 

If an individual in another state brokers notes to an out of state
institutional investor but the property is in CA, do they need a CA RE
Brokers license? And does the 7 notes in year apply to them as well?
YES.

 

What are the ramifications or penalties if someone is caught doing this
business without a license for the above scenarios? For note brokers in CA?
For out of state note brokers? Etc.

They will be served a Desist and Refrain Order.  If it is not followed and another Desist and Refrain Order is served it would be brought to the attention of the CA state Attorney General and could be prosecuted by the California Attorney General's office as a misdemeanor.

 

        So let me sum it up for you.  If you are in the business already or if you are new to the business and just starting out and you are going to be buying every single note for yourself with your own money and never resell them then you do not need a CA Real Estate Broker's License to do so.  However, if you will be soliciting for and brokering notes inside or outside of California, whether you live in California or not, you must have a CA Real Estate Agents license hanging under a supervising CA RE Broker OR have a CA RE Broker's license yourself.

        On a more positive note, Mr. Sibner did mention the fact that in the 15+ years he has been with the CA DRE they do get calls from individuals asking about the licensing requirements for a note broker.  However, he stated, they rarely get calls from note buyers or note sellers complaining of fraud, misrepresentation or negligence.  I guess the entire ethics and integrity of our business is doing well, let's keep it up.

        My advice to you is, if you already have a CA RE Broker's License, great. However, If you live in California and you are going to broker a note or sell a note you purchased with your own money start the process of obtaining your CA RE Broker's license.  If you live out of the state of California and you want to broker a note or sell a note you purchased  in California start the process of obtaining your CA RE Broker's license now before they make more of an issue out of it. You do not want to be the one they make an example out of.

        Next month I'll have some comments on the note business in general and about bees (yes, those flying, stinging bugs). Have a wonderful month!  Keep marketing, it's going to work! J

 

Jeff Armstrong

 

PS - The Personal Cash Flow Prosperity book is still for sale at $40 even (regularly $67.75) I pay shipping through the end of summer (September 21). Just email me and I'll send you a Pay Pal Invoice and get the book and audios out to you asap. TWITA! J

 

PPS - Thanks to all of you who took the survey a few weeks ago. The results are being analyzed and I will keep you informed of any news! Thanks again! 

 

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Jeff Armstrong is President of Armstrong Capital and was the Editor of the NoteWorthy Newsletter from 2006-2008. He is a member of the Million-Dollar Club, a Master Broker/Buyer, visiting instructor for the American Cash Flow Institute, Instructor for Nouveau Riche and the author of several best selling industry books. He can be reached by calling 800-845-3055, faxing 818-865-2323, e-mail jeff@armstrongcapital.com, or visit www.armstrongcapital.com and click on "Note Brokers" for answers, articles and information about his Master Broker services and how Armstrong Capital can help you succeed.

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